On July 1, Seth Bannon appeared before several hundred techies and investors at the New York Tech Meetup, the industry gathering where Tumblr and Foursquare made their debut.

Even among this pedigreed audience, Bannon inspired great interest. The company he founded in 2010, now known as Amicus, had raised nearly $4 million from investors and was the rare start-up that made money while doing actual good, helping nonprofits like the AFL-CIO and the Texas Democratic Party mobilize supporters. An Obama campaign alumnus, Bannon frequently appeared on panels at conferences like South by Southwest. He inspired mentions not just in tech publications, but in business and general-interest outlets like The Economist and The Atlantic, which gushed that Amicus had “helped activists in Minnesota and Washington win same-sex-marriage campaigns.” In 2012, he and his co-founder Ben Lamothe were named to the Forbes “30 under 30” list of social entrepreneurs.

Bannon, decked out in jeans, a brown T-shirt, and de rigueur beard, took the opportunity to introduce his company’s latest product—a tool that allowed supporters of nonprofits to send customized, tangible postcards to their friends on the organizations’ behalf. He began to move through his slides, showing how the card was constructed with a succession of clicks. “I can even flip the post card over to see the front artwork. In this case”—he paused so the crowd could laugh at a picture of baby badgers that flashed on the screen—“Yeah, exactly. You’re giving money.” Before wrapping up, Bannon made a special announcement: Over the past three years, Amicus had only worked with nonprofits. Now, for the first time, for-profit companies could enlist its help, too. “If any of you want to use it, go to amicushq.com/nytm, and you can jump to the head of the waiting list,” he said.

Every successful startup is in some sense a confidence game. Any founder who told the literal truth about the frenzied ad-hockery of launching a company would scare away customers and investors and quickly be out of business.

Even by the standards of this world, however, Bannon was engaged in some rather brazen frontsmanship. In early June, just a few weeks before he took the stage, Bannon revealed to his co-founders that Amicus owed the IRS roughly half a million dollars because it hadn’t paid payroll taxes for several years. Though Bannon, who as CEO chose to have sole responsibility over the company’s financials, had been alerted to the oversight months earlier, he never disclosed the information to the rest of the company’s leadership. It was not until his two co-founders, Topper Bowers and Ben Lamothe, caught wind of the problem on their own that they finally pried it out of him. “My initial reaction was numbness, shock,” says Bowers, one of a dozen former colleagues who spoke with me. (Bannon himself declined to comment.)

Then, in late June, Bowers and Lamothe learned indirectly from the company’s accountant that the money problems weren’t over, even though Amicus had paid its back taxes. The company was also on the hook for over $90,000 more in tax penalties, and at least $100,000 in outstanding legal fees. They also discovered that the company had additional financial exposure because it had gone months without workers compensation insurance, something New York State requires. Bowers and Lamothe went to confront Bannon about these latest revelations, only to discover that he was in Boston for the day dealing with a lawsuit from a previous co-founder, which also came as news. “At that point I was done,” recalls Lamothe. “That was my breaking point.”

Both men resigned the following Monday, concluding that they could no longer trust Bannon. The CEO then bowed to financial reality and laid off most of his remaining employees over the next week. By the time Bannon turned up at the Tech Meetup, Amicus, which had employed 15 people a few months earlier, consisted of him, a web designer, and two programmers. His investors were up in arms. It seemed only a matter of time before his customers deserted him.

And yet, given the way the tech industry works these days, it wasn’t crazy for Bannon to appear on stage as though nothing were wrong. After all, Bannon’s history of misleading people was known to those he worked with even before he lined up his big investors. It didn’t hurt him then. You might even say he was rewarded for it.

In the summer of 2012, Bannon, Bowers, and Lamothe participated in Y Combinator, a kind of boot-camp for startups in which 50 to 100 teams of founders spend three months in Silicon Valley under the tutelage of the famed investor Paul Graham.¹ Amicus likely stood out among thousands of applicants not just because of its revenue stream, but its novel use of social media. The company’s software allows workers at campaigns and other nonprofits to fish for supporters among people they have a personal connection to—such as a common friend, hometown, or high school—which significantly increases the uptake.

In exchange for a six-to-seven percent equity stake, Y Combinator helps each company make itself attractive to investors, whom the founders pitch during a much-hyped “Demo Day” at the end of the program.² What Y Combinator doesn’t do is spend much time on the basics of how to run a business. As the writer Randall Stross explains in a recent book, the startup accelerator is best understood as a PhD program in entrepreneurship. The founders hole up in their houses at all hours of the day and night, venturing out for a weekly dinner at the Y Combinator office and not much else. Though the teams were invited to pump Graham and his partners for advice during regular “office hours,” Bannon’s co-founders recall little instruction on how to, say, hire workers or manage a budget.³ It was a doctoral program in which many students were never exposed to the undergraduate curriculum.

In Bannon’s case, preparing to be a CEO often meant relying on an idiosyncratic interpretation of what was essentially Silicon Valley lore—a haphazard collection of insights culled from books and blog posts, observation of other entrepreneurs, and, above all, the Y Combinator discussion board, “Hacker News.” Bannon would allude to the site so often—“I’ve read tons of Hacker News about this,” he’d say—that his co-founders pleaded with him to stop because it sounded so amateurish.

The holes in Bannon’s self-education were constant features of life at Amicus. For years, Bannon neither hired an accountant nor prepared a detailed budget. At one point he stopped paying the company’s outside lawyers, leaving his sales team without a legal expert to review the contracts they negotiated with customers.

Bannon learned that the founders of other businesses, like Airbnb and the apparel site Zappos, had focused on “culture” rather than their bottom line as young companies. He took this to mean he should only hire employees he could relate to in the most adolescent ways. “Seth had a skewed notion of what culture meant,” says LaMothe. “If you weren't just like him and into the same things, then you weren't a ‘culture fit.’” In the summer of 2012, Bannon and his co-founders were on the verge of hiring a web designer, but after several meetings Bannon worried that the leading candidate was too soft-spoken and unassuming. To resolve his doubts, Bannon asked the candidate join him late one night at the Palo Alto house where he and his colleagues were living. Instead of an interview, they had a Nerf gun battle, replete with strobe lights and Batman music.

Serving as the CEO of a company seemed to bring out the worst of Bannon’s immaturity. When the company was based in Connecticut in 2010 and 2011, he had a habit of walking in the middle of the road and pointing at oncoming cars until they stopped. “I would say ‘Seth you’re an asshole’ all the time,” recalls an early colleague. A few months later, Bannon bought an iPad on the company’s dime without running it by co-workers, then promptly lost it. “One day he wasn’t playing mahjong on the way to work. I said, ‘Where’s the iPad?’” recalls the colleague. “He said, ‘Don’t tell anyone. I think it’s stolen. I can’t find it.’” This person insisted he fess up to a third colleague who oversaw the company’s finances, but it took days of prodding before Bannon finally did. (Ironically, one of Bannon’s favorite mantras was “make mistakes,” words that adorn the T-shirt he’s wearing in his Facebook profile photo.)

Friends and co-workers were inclined to cut Bannon some slack: His father had left the family when he was a young child and his mother later suffered debilitating physical and mental injuries from an accident at their home. “At his core, he’s not a bad kid,” says one former supervisor. “He just can’t get out of his own way.”

Still, there was a least one odd behavior that even friends had trouble overlooking. Bannon was fond of informing people he had attended Harvard. The slides he showed potential investors noted that he was “dropping out of Harvard University” to work on the start-up full-time. But the way Bannon spoke about his Harvard days was dubious. At one point a prospective investor asked whether he had been an undergrad or a graduate student at the university. “Yeah,” was Bannon’s response.

Finally, in September of 2011, an adjunct Yale computer science professor named Brad Rosen became suspicious. Bannon had specifically told Rosen, who had two students working at the company, that he’d dropped out of Harvard College, the undergraduate liberal arts school Mark Zuckerberg once attended. But some Googling revealed that Bannon had instead enrolled at the Harvard Extension School, a continuing education program with far laxer admissions standards. “He lied to my face, no question,” says Rosen.

Bannon apologized by email for “having deceived you” once Rosen pressed him, but the weaseliness continued. When Rosen’s students insisted that Bannon set the record straight for the company’s early investors, he did so in a strange email on Yom Kippur, writing: “In the spirit of the day I wanted to clarify something”—that he had dropped out of Harvard’s Extension School, not Harvard College—and “ask for your forgiveness for not having done so earlier, if you were indeed under the wrong impression.”

By the time Bowers joined Amicus in late 2011, the two employees who’d forced the issue had left the company to return to school. Bowers assumed his new boss had dropped out of Harvard College thanks to a not-quite-accurate email from Bannon about his education. (Click here to read the full email.) Lamothe, who had first met Bannon as an MIT undergrad in 2002, joined a few months later and was under the same impression. They only learned the truth later on, from friends and relatives who had become suspicious and done some digging. When Lamothe finally confronted Bannon this past June, accusing him of lying about Harvard for over a decade, Bannon responded: “I wasn’t lying. I was being deceitful.”

On Tuesday, June 24, Bannon sent his 20-plus investors an email revealing that the company had only $400,000 in the bank after paying more than half a million dollars in back taxes—enough to last it a mere three months fully staffed. By way of explanation, he said he “recently” hired an accountant who discovered that the company’s payroll system had been withholding but not submitting the taxes for years. He also wrote that Bowers and Lamothe had resigned as a result of their frustration over being kept in the dark. “Further,” he added, “they expressed concern over my willingness to bend the rules of ethics in order to push Amicus forward and they told the team as such. This might even be true.”

The email included several odd notes. For example, how had Bannon never noticed that the Amicus bank account was several hundred thousand dollars larger than even the crudest back-of-the-envelope projection would have predicted? There was also the dubious use of the word “recently,” when in fact Bannon had known about the issue for months.

Many of the investors concluded that Bannon should step aside, and several met with him personally to urge this. One explained that Amicus was a goner unless it raised more money. But, he added, none of the current investors was going to put up another cent, and there was no chance of attracting new investors under the circumstances.

On July 2, Bannon issued his second communiqué. He apologized again for the “lack of financial management that led to unpaid taxes” and “the Harvard ambiguity” (which was itself ambiguous since he hadn’t previously come clean about his embellishments to the entire group). “I'm offering no excuses, these were horrible mistakes to make,” he wrote. Still, he’d “done a lot of soul searching” and concluded that “the mission of Amicus is best served by me remaining at the company.” He laid out his strategy, which included letting go of all but three employees, and focusing on Amicus Post, which he believed “represents a huge opportunity for growth.”

In plain English, this roughly amounted to saying: I’ve lost most of your money and my employees due to a combination of incompetence and evasiveness. I have no prospect of raising more capital, and my only chance of generating new revenue is a product that’s still unproven. Nonetheless, I’d like your blessing to keep going. It was preposterous pitch. But something strange happened after he made it: The investors more or less acceded. They weren’t going to kick in more money, but neither would they force Bannon out.

The proximate reason was that, even though Amicus had raised millions of dollars in capital, it collected the money in relatively small increments. Writing off the investment wasn’t going to break anyone, while the only real prize for dislodging Bannon in a legal fight would be assuming the liabilities of a nearly defunct company. No surprise, then, that at least one investor, Dave McClure of a Y Combinator-like accelerator called 500 Startups, was practically blasé in response to Bannon’s email. “[I]f you need an office in NYC to work out of, we probably have some extra space,” McClure wrote, cc’ing the group. McClure said he hoped Bannon had “enough trust / bandwidth / support to keep rolling.”

Still, the bigger problem was what the investors failed to do when they put up the money in the first place—which is to say, make a real effort to vet the company’s CEO. The crass reality is that it doesn’t make economic sense for most tech investors to conduct due diligence, at least not until a company is several years (and rounds of funding) along.

Before Y Combinator, Bannon raised money from a handful of small-time angels—independent investors with modest portfolios who gave ten and twenty thousand dollars a piece. These angels often skimp on due diligence because they have no partners or support staff to assist them and the sums they invest are small.

After Y Combinator came a stampede of venture capitalists and institutional angels who contributed to a so-called seed round worth over $3 million. These investors didn’t do much vetting either, according to Bowers. The several hundred thousand dollars the largest firms put up was tiny fraction of their overall funds, which run into the hundreds of millions of dollars. And many seed-round investors regard Y Combinator’s imprimatur as sufficient for their purposes. Nine of the 70-plus companies that participated in Demo Day along with Amicus raised $2 million or more within a few months of the event. In two of these cases, the companies raised more than $6 million.

As for Y Combinator itself, the application process doesn’t involve anything resembling a background check either, except in rare cases where there is cause for suspicion. “We invest relatively small amounts of money across many companies, and as part of that, we don't do heavy diligence,” Sam Altman, Graham’s successor as YC president, told me. The accelerator assumes there will be at least several dozen flameouts for each success. “In purely financial terms, there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business,” Graham has written. The incentives arising from this model help explain why the accelerator has periodically admitted some dodgy figures—from a co-founder who resigned from his company after praising the manifesto of alleged Santa Barbara mass murderer Elliot Rodgers, to another who published a rancid attack on homeless people and women.

Graham and other seed investors often seem less interested in founders' personal backgrounds than in someone who looks the part. “I can be tricked by anyone who looks like Mark Zuckerberg,” Graham told to The New York Times last year. “There was a guy once who we funded who was terrible. I said: ‘How could he be bad? He looks like Zuckerberg!’” He may have been exaggerating for effect,⁴ but such biases clearly exist. “As VCs and angels, we have this ‘We’re smarter than anyone’ kind of thing,” says one Amicus investor. “But we’re lemmings like anyone else. There are signals we think suggest more success.

And those biases weren’t lost on Bannon, who seemed to tailor his persona to fit them. During Y Combinator, Bannon lived in the same house where Zuckerberg binge-coded an early version of Facebook. He played host to a CNN Money reporter, who noted that “like Zuckerberg, Bannon is a Harvard drop out,” and asked if there were other similarities. “Hopefully, there will be more,” Bannon responded. (In a blog post reflecting on some of his mistakes, Bannon noted that he’d “sacrificed my credibility for little benefit other a sense of false prestige and a sexy line in a press story.”)

In fairness, Y Combinator was quick to grasp the seriousness of the Amicus situation after Bannon’s disclosures,⁵ and Bowers and Lamothe remain proud of their ties to the accelerator. "I don't blame them for this mess. They do more than any other seed-stage investor to weed out weak links,” says Bowers. And it’s true that Y Combinator alumni have avoided the criminal behavior that has sometimes plagued its imitators. Under Altman, one of the most scrupulous actors in Silicon Valley, the accelerator has adopted a detailed ethics statement and a policy of divesting from any company that violates it.

Still, it’s hard not to put some of the blame on Y Combinator, or at least the world it helped create. Bannon’s habit of being so cavalier and deceitful was knowable, even if it required some digging. “We’ve given up on the things we’re supposed to be doing,” laments the Amicus investor. “Had I done diligence, I wouldn’t have done the deal.” But the popularity of seed rounds consisting of a dozen or more investors who each contribute relatively modest sums—something the demo day phenomenon appears to encourage—means that often no one takes it upon himself to figure out who, exactly, they’re dealing with.⁶ And the few who do risk missing out on great wealth. There is almost always another investor who will ask fewer questions.

On July 8^th, Bannon posted a poignant message on his Facebook page. “Startup friends,” he wrote. “Have you read any good books / resources on accounting / finance?” It was followed by an emoticon labeled “feeling curious.” Seth Bannon is responsible for every mistake he made at Amicus—no one would argue otherwise. But the system that put so much money in his hands without checking if he could handle the most basic functions of leadership—well, that system has something to answer for, too.

Sam Altman, an alumnus of the first-ever Y Combinator class in 2005, took over for Graham as president of the accelerator earlier this year.
The founders also typically receive some capital in return. The precise terms have changed over the years, but the current arrangement is $120,000 in exchange for 7 percent equity in the company.
Altman, the current president, says there is a one-off seminar during each batch on how to “hire, manage, and run” a company, as well as regular emails about the need to set up payroll and the like. Some of these rudiments are also discussed during an initial kickoff meeting with everyone admitted to the accelerator.
Graham’s wife, Jessica Livingston, who sat in on the interview with the Times, says he was making a self-deprecating joke.
After Bannon thanked the “YC Community” for its support in the blog post where he admitted his mistakes, the firm’s in-house lawyer responded that “YC supports its companies through good times and bad, but we do not support illegality.”
YC does encourage Demo Day investors to conduct due diligence, and Altman himself has criticized the trend toward seed rounds with upward of ten or 20 investors, known as “party rounds.” On the other hand, party rounds do appear to be a natural response to the demo day phenomenon that YC popularized.

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